Capital markets ITO contracts scope characteristics: Regulatory compliance and analytics highest; digital components on the rise
Capital markets ITO contracts scope characteristics: Regulatory compliance and analytics highest; digital components on the rise
For five years we at Everest Group have tracked the cloud space in global services. Until this year, there was a lot of talk about cloud, but much true cloud adoption was driven in business units with large enterprises. CIOs basically sat out the game and watched the cloud’s performance. But since the beginning of 2014 we’ve seen a real shift in large enterprise CIO organizations, which signals a significant change for the services industry.
Until recently CIOs in large enterprises were reluctant to put cloud initiatives in place because they felt it was premature. They struggled with compliance and security questions. And they worked to make sure their organization understands and embrace cloud and as-a-service technologies. Their posture is moving from cautiously watching to actively planning and driving, and some have large initiatives underway. Their plans with regard to cloud have moved from the radical fringe to mainstream strategic intent to embrace and drive.
Large enterprise tech budgets are still controlled by the CIO organization because they are best able to drive technology initiatives to scale and to execute initiatives across functions.
This is a very important development and will cause significant changes in the technology and services industry. This undoubtedly will start to drive a significant shift in spend from the traditional structures into the cloud and as-a-service models. As that occurs, we believe it will pick up momentum and pull the rest of the industry through.
Leaders are investing in technologies and striking partnerships
I recently had the privilege to sit through a two-day session with IBM’s senior executive team in services. I’m someone who tries not to drink the Kool-Aid. Even so, I came away truly impressed by the work that IBM has done to position itself to be relevant and a major player in the future of IT infrastructure.
I’ve written frequently in this blog about the impending crisis that all asset-heavy players face as first RIM and then cloud attack their revenue base. This unrelenting onslaught is already moving share from the incumbents such as IBM to challengers such as HCL and TCS and will only be exacerbated as cloud takes stronger hold.
I came away with from the two days with IBM realizing Big Blue’s profound understanding of this phenomenon and its positioning of offers that allows them to leapfrog the RIM model and play a decisive and significant role in cloud.
Taken as a whole, IBM’s public cloud software and private cloud and automation strategies gives it the capability to move clients smoothly into the future. And it assures capturing the run-off from IBM’s traditional business while at the same time expanding market share. This is truly a formidable set of capabilities that, if executed well, will ensure IBM is a major — if not dominant — player in the future of IT infrastructure.
Everything will come down to execution, and history has seldom been kind to incumbents in the face of major technology and business model disruption. But based on the two days I spent with IBM, I believe that IBM has more than a fighting chance to successfully make this transition.
Photo credit: Irish Typepad
Singer/songwriter Lyle Lovett wrote a song with the line “If I were the man you wanted, I would not be the man that I am.” With apologies to Lyle Lovett, I think this is a very appropriate line when applied to IT infrastructure services today. Clients’ changing expectations of their incumbent IT infrastructure service providers leave the providers lamenting like the forlorn cowboy in Lovett’s song.
It’s only natural for companies to want their incumbent service providers to bring them cloud offerings. Their expectations are set by what they read and see from Amazon, Microsoft and Google. They want the infrastructure services price dropped, the benefits of elasticity and flexibility of the cloud model and usage with no commitment. Companies are trying to persuade or force their infrastructure providers to bring cloud offerings.
But IT infrastructure providers are unable to provide what they want.
The clients helped created the underlying problem. The incumbents’ services are bespoke, unique, and have been dictated through client contracts in a different kind of delivery model. In this model, costs rise every year through COLA rather than plummeting like the price of public cloud. The cost of public cloud services had been dropping around 20 percent per year but is now accelerating with the latest adjustment between 60-80 percent in a single downward-pricing adjustment by Google, quickly followed by all the major cloud players.
The pricing components are not apples to apples, and companies understand that. But plummeting prices play into client expectations. Expectations of business users that they ought to be able to have deflating costs with elasticity and flexibility and limited or no long-term commitments just cannot be met in the traditional outsourcing base.
The incumbent providers’ delivery model is a recipe of the client’s own making. Clients dictated where the provider can provide services from, what kind of service the provider must deliver and demanded customization to address their needs. As a result, providers have huge stranded investments tied up in providing what the clients demanded.
There is no “they lived happily ever after” end to this situation. Among infrastructure clients, the situation causes increasing unhappiness as their unmet expectations further diverge from the reality of the services their incumbent providers deliver. But because of contractual obligations and because of their orientation, the incumbent service providers simply cannot change.
So, like the forlorn cowboy in Lyle Lovett’s song, the lyrics resonate with great poignancy among today’s service providers … “If I were the man you wanted, I would not be the man that I am.”
Photo credit: Cristian Viarisio
If you read the technology news in the press and social media sites, it’s apparent that we’re in the midst of a big sea of change in which the as-a-Service and public cloud models are transforming the services industry. HP and IBM’s travails and Oracle’s slowdown are laid at the feet of the SaaS providers. But when you pile all the current cloud activity together, it amounts to a hill of beans, not a mountain. Why aren’t we seeing evidence that disruption from these models is happening on a significant scale?
In the famous words of an American hamburger TV commercial several years ago: “Where’s the beef?” Everyone is talking about big agendas to rework workload portfolios and making big efforts to to do that. Yes, Accenture has invested well over $1 billion around cloud and several Indian providers have invested $100+ million a year in mobility and cloud work. And the HCL-CSC alliance is predicated on the fact that there will be a huge cloud sandwich for which they want to position themselves.
If you give providers half a moment, they’ll wax with great eloquence and excitement about the prospects for the cloud model as a high-growth area in services. But if cloud disruption is coming to the services industry, it must be walking; it sure isn’t running.
Where are the billion-dollar practices that do cloud? Why don’t we see service providers launching entire new practices or start-ups reworking applications so they work in the cloud? Who is doing all the work?
The answer to the above questions is that disruption to service providers is happening occasionally but not en mass.
It reminds me of a conversation I overheard around the impending revolution about self-driving cars. Supposedly a Google executive was saying that it’s not likely that new self-driving car will come on the market and people will buy them when they arrive. Instead, he believes the more likely scenario is that we’ll find ourselves using cars that park themselves and then over time become incrementally more capable and eventually driving themselves. But we won’t have gone through that aha moment where we went out to buy a self-driving car.
I think the same thing is happening with cloud disruption. There just doesn’t seem to be a lot of evidence that companies are driving huge transformations to the cloud right now. Maybe it’s a timing issue in which CIOs and large enterprises will become comfortable enough with the technology that they’ll move en mass to rework their ecosystems to embrace this model. But maybe they won’t embrace it like this and, instead, the industry will wake up one day and find that we’ve incrementally adopted SaaS, public cloud and private cloud.
Perhaps the tide bringing cloud disruption is coming in slowly rather than in as a tsunami. What do you think?
At Capgemini global analyst event in London last week, the company provided a holistic view of its business growth strategy and internal initiatives to enhance skills and sales capabilities.
Capgemini management was relatively upbeat about growth opportunities while acknowledging the continuing headwinds in its main market in Europe. Economic uncertainty continues in continental Europe, but the need for cost cutting and efficiency is driving demand for services. Capgemini also expects growth from wider adoption of outsourcing and offshoring in continental Europe with a number of large deals on the horizon. Disruptions from cloud and offshoring continue to negatively impact revenue growth but improve margins. At the same time, cloud and other disruptive technologies such as big data, are increasing demand for services and boosting business.
Against this backdrop, Capgemini provided guidance of 5% – 7% organic revenue growth for the mid-term. Paul Hermelin, Group CEO, also indicated that the company is well on its way to achieving an operating margin of 10%. Assuming a 2-3 year period for mid-term, this is in keeping with outlook at the end of Q1 2014: organic revenue growth of 2% to 4% and an operating margin rate between 8.8% and 9.0% for 2014.
In terms of services, industrialization, standardization, innovation and pre-packaging dominated the company’s strategy. In infrastructure services the strategy has seen service delivery standardized and globalized with increasing focus on RIM, automation, cloud migration, orchestration and brokerage services. Capgemini saw +19% growth in cloud bookings year on year in 2013.
Application management has turned into a success story for Capgemini too. This is something of a turn around with dwindling bookings reversed into an increase of 60% in 2013 and 40% in Q1 2014. This has been achieved through industrialization and taking a factory approach to AM. Capgemini highlighted circa 30% cost savings for clients through this approach. It is also offering a new approach to AM services with a business process focus – where KPI’s include related business process metrics. This is a novel approach to AM that Everest Group will cover in a separate piece.
Another key lever for growth is innovation with Capgemini investing in IP in its strategic offerings (which are based on major technological transformation themes such as customer experience, cloud, mobility, big data, and social media). In keeping with this strategy, Capgemini will continue to target demand in the market for digitization of services and for transforming big data into new business opportunities. Similar opportunities from the Internet of things is also on its radar.
The widening of the strategic offerings portfolio with more IP is to boost profitability with higher margin services. Capgemini has shown that it can do well in these. Its strategic offerings grew by 19% in 2013 and are on the way to grow by 20% in 2014.
The drive for innovation is likely to lead to more acquisitions and partnership co-development. The latter brings with it the risks of investing in ambitious technology that proves too difficult to bring to market in a timely fashion e.g. Skysight, the cloud service orchestration product which Capgemini is developing in partnership with Microsoft, has been delayed.
Verticalization is another growth lever for Capgemini. One example is industry managed services offerings with OnePath Suite. This consists of pre-packaged SAP solutions that have been pre-configured for specific verticals, such as CPG, Energy and Life Sciences, and which will be delivered and set up as part of hosted and managed services with the potential to add business process services on top of bundled infrastructure and software integration.
BPO services are also being extended from the core F&A offerings to a broader set of services aimed at CFOs, including spend analytics, internal audit, SC analytics and MDM, and tax efficient accounting.
Internal organizational measures include:
With globalization of services have come the challenges of managing resources better and increasing utilization rates. Capgemini needs a robust global organization to support its evolving delivery model. The HR strategy is addressing this requirement.
Capgemini has had an entrepreneurial culture with many P&L centers. This has led to a sales structure that has adapted to local market conditions. The implementation of a ‘One Group’ approach to major accounts is needed to tap into large multi-national opportunities that can now be supported by Capgemini’s global delivery model.
Overall, Capgemini has made excellent progress in transforming itself to ride the wave of demand in the market for modernized services and to compete with India-based vendors who are targeting Europe, Capgemini’s biggest market. Offshoring and globalization of service delivery has been largely achieved. Other aspects of the strategy are still work in progress but with the economic outlook generally brighter across the globe, the company is set well to achieve its latest guidance.
Today’s conversations and research around technology disruption and the causes invariably focus on cloud services, and rightly so. Be it infrastructure, software, or any other facet of technology consumption or development, cloud services have had, and will continue to have, the most disruptive impact. The disruption discussion also includes the impact of mobility, next-generation analytics, and the growing importance of software to control the enterprise.
This is leaving enterprise technology providers in a state of amazement and numbness. They are investing all their energy in responding to these disruptive trends. However, there are equally important dimensions they need to understand. Some of these include:
Where is the talent? How many conventional enterprise technology providers are the first choice of employees these days? They themselves believe, very few. The mindboggling (and questionable) valuation of companies such as Pinterest, Uber, and WhatsApp, and the flood of consumer technology start-ups/niche firms (reminders of 2000?), are pushing the technology talent toward these smaller companies. Job seekers now believe that all the action and fun are in consumer technology. Even within the enterprise technology segment, new candidates and existing talent are focusing on new and innovative firms (e.g., Alteryx, Coupa, Dropbox, Palantir, Tableau, Workday) or their own start-up more than on traditional vendors. Given that technology is as good as the people who innovate it, this is a serious threat for most enterprise technology providers.
Where is the plan? Enterprise technology providers take pride in their exhaustive business case modelling and time to market planning. These cases normally create a multiyear plan and staggered investments across the timeline. However, given that technology disruption is reducing the cycle of innovation and time to market, these time and tested strategies are increasingly becoming irrelevant. Do these technology providers have sufficient internal strength, processes, and willingness to jettison the age-old model of investment planning and be in sync with the shortening technology cycle?
Why so many competitors? The huge entry barriers incumbent technology providers created for newer players are crumbling in the face of technology disruption. Enterprise buyers, driven by internal and external factors, have become more receptive of nimbler and more innovative technology companies than in the past. Moreover, new-age technology providers now better understand the requirements of an “enterprise grade product.” More so, the enterprises’ requirements are themselves undergoing significant changes that suit these new-age technology firms, such as agility over control, and first to market rather than best to the market.
The enterprise technology providers are responding by leveraging their tried and true methods of acquisition, (e.g., IBM/SoftLayer, VMware/AirWatch, Tibco/Jaspersoft,) and partnering with nimbler firms (e.g., SAP, Microsoft, and IBM partnering with Hortonworks and Cloudera for Hadoop, HP partnering with OpenStack for cloud services, and Oracle partnering with NetSuite for SaaS.)
The big challenge these enterprise technology providers now have is to strategize based on the type of competition. In earlier times, they knew their competitors and how they would react, and they were comfortable in their planning meetings. However, now the environment has changed. No one knows who and where the next competition is coming from (airline industry versus video conferencing, anyone?)
While there are likely numerous other dimensions shaping the technology market today, they are tough to foresee. This makes enterprises’ and technology providers’ task of planning for their technology roadmap almost impossible.
What is the best way to move ahead? Should enterprises and providers stop their technology planning cycles and become real time planners? Should they wait it out for the disruption smoke to clear? Should they continue with their existing strategies?
If you are an enterprise technology provider or a customer trying to make sense of this juggernaut, please do share your perspectives with me at [email protected].
The Promised Land of SaaS and cloud models in the services world is clearly visible, but it’s frustratingly difficult for service providers to get there. The new models are the land for service providers’ growth and profits, but providers are finding it painful and frustrating as they try to move to the new models.
Software companies are shifting from the traditional on-premises licensing/deployment model to SaaS and cloud subscription models, and it’s not a trivial matter to make the switch. They have to change operational practices and investments and stop doing some activities to be able to do the new models’ activities. The transformation pulls them in two different directions.
Outsourcing service providers have the same problem as the software vendors. As SaaS takes hold, it changes customers’ expectations, and they want to buy services on a consumption or subscription basis instead of buying a set of components. They want to pay only for what they use rather than a take-or-pay model where they have to buy commitments.
In attempting to accommodate these increasingly vocal clients, providers are forced to move in two opposite directions at the same time. First they have to accommodate their original client demands with their existing service contracts structured in a business model where the provider charges customers on the basis of service components (e.g., buying 30 applications people, 15 servers, 50 licenses). But new demands require that these components are bundled, delivered and priced on a functionality on demand, or consumption basis. Their SaaS or Saas-like expectations require different approaches and even different customer support.
These two different business models are driven by different customer adoption patterns and also often driven by a different set of stakeholders making the decision. The new business stakeholder buyer is less concerned about cost per unit and more concerned about meeting the business needs. And they are increasingly influential in driving new opportunities.
Hence the dilemma for incumbent providers. The traditional business model won’t support a SaaS model, and the SaaS model won’t support a traditional model. The result? The provider is like a carriage drawn by two horses pulling in different directions. It’s not good for the carriage and quite frustrating for both horses.
Providers, thinking the dilemma is just a pricing issue, try to make their existing teams and business operate in both worlds and price services on a consumption basis the way new customers want to buy it. But they quickly find that’s not the case. To succeed, they need to backwards-engineer their entire delivery platform so it can work that way.
The alternative is to have two “carriages.” But then they have double the costs. There’s the frustration in getting to the Promised Land: they’re faced with having one carriage and two horses pulling it in opposite directions or having two carriages and twice the cost. The trip to the Promised Land of growth in the cloud world isn’t as simple as it appears.
Moving work from an enterprise data center to the cloud is not a lift-and-shift transaction. Cloud moves involve reengineering processes. The good news is that providers are emerging with innovative solutions for deploying to the cloud. We’re watching their progress, as we believe they will disrupt the traditional players in the services market.
I blogged before about CSS Corp Cloud Services’ solution for cloud migration. Redwood Software and its RunMyJobs platform is another proven automated cloud migration solution. Redwood’s solution includes automation consultants who are skilled in reengineering high-value processes and packaging them for cloud migration through Redwood’s RunMyJobs platform. The solution is especially effective for problematic legacy applications.
Meeting enterprise needs
Both of these specialist firms provide interesting capabilities for moving production opportunities to the cloud with ease. They have a demonstrated and growing track record of successfully deploying applications into the cloud in a way that meets the robust security compliance, performance and resilience requirements of sophisticated large enterprises.
The impending disruptive nature of RunMyJobs and other such automated cloud migration technologies raises some hard questions about traditional service providers’ capabilities.